Car rates

The Fed sees its rate hikes increase to stifle runaway inflation

June 10 (Reuters) – Stubbornly high U.S. inflation is fueling bets that the Federal Reserve will become more aggressive in its bid to ease price pressures, with risks of higher interest rates and a policy rate that should exceed 3% by the end of the year.

Fed policymakers had already nearly promised half-point interest rate hikes at their next meeting next week and again in late July, following May’s half-point hike and the start of balance sheet reductions this month. That would be more policy tightening in the space of three months than the Fed did in all of 2018.

But on Friday, traders of futures linked to the Fed’s key rate began pricing on an even bolder path after data from the US Department of Labor showed a sharp rise in food prices and record prices. prices that pushed the consumer price index (CPI) up 8.6% last month from a year earlier. . A separate survey from the University of Michigan showed that longer-term inflation expectations have risen to their highest level since 2008. Read more

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Fed funds futures prices now reflect a greater than equal probability of a 75 basis point rate hike by July, with a one in five chance of it happening next week – up from a one in 20 before the inflation report – and a policy rate in the range of 3% to 3.25% at the end of the year.

Yields on two-year Treasury bills, considered a proxy for the Fed’s key rate, rose the most in four months on Friday and topped 3% for the first time since 2008.

“We believe today’s inflation data – both CPI and UMich inflation expectations – is a game-changer and will force the Fed to shift into higher gear and tighten policy. initial charge,” wrote Jefferies’ Aneta Markowska, who joined Barclays economists on Friday in forecasting a 75 basis point rate hike at the June 14-15 Fed meeting.

The core CPI, which excludes energy and food price volatility, rose 6% in May, down slightly from April’s 6.2% pace, but nowhere near the “sign.” clear and convincing” of cooling price pressures that Fed Chairman Jerome Powell said he needs to see before slowing rate hikes.

“Any hope that the Fed can slow the pace of rate hikes after the June and July meetings now seem remote,” wrote Greg McBride, chief financial analyst at Bankrate.

Deutsche Bank economists agreed and said they now expect rates to rise to 4.125% by mid-2023.

Fed policymakers at the end of next week’s meeting will release their own estimates of the level they will need to raise short-term rates.

In recent weeks, some had expressed hope that by September their own rate hikes, along with easing supply chain pressures and an expected shift in household spending from scarce goods to services, would have started to ease pricing pressures and allowed them to downgrade to small rate hikes.

Friday’s inflation report suggested otherwise.

Used car prices, which had fallen, reversed and rose 1.8% from the previous month; airline fares increased 12.6% from the previous month and 37.8% from the previous year. Housing prices – where trends tend to be particularly persistent – rose 5.5%, the biggest rise in more than 30 years.

The current Fed rate target is now 0.75% to 1%. Fed officials want to raise it without undermining a historically tight labor market and sending the economy into recession.

May’s inflation report seems to make this task even more difficult.

“Those are ugly numbers. … I would say we’ll probably be in a recession in the fourth quarter of this year with confirmation in the second quarter of 2023,” said Peter Cardillo, chief economist at Spartan Capital Securities.

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Reporting by Ann Saphir; Additional reporting by Lindsay Dunsmuir and Stephen Culp; Editing by Marguerita Choy, Chizu Nomiyama and Leslie Adler

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